Oregon’s crazy tax rates

Report from Oregon: “Once the state’s new rec rules are fully implemented, the 25% tax will be downgraded to a 17% sales tax.”

That’s crazy. It illustrates how early in the process of figuring out how to tax marijuana we are – or else how Legislatures don’t work. Businesses will struggle at first. Any tax relief should happen early, not late.

The RAND Report, Considering Marijuana Legalization: Insights for Vermont and Other Jurisdictions, explains how taxes should go up over time. Why Oregon would ratchet them down is hard to figure.

“A brand-new legal marijuana market will not soon be stable. Fluctuating pretax prices would push after-tax prices around. Early on, the industry would likely suffer from lack of production capacity. Short supply would result in high early legal pretax prices.Adding high taxes to those high pretax prices would tend to drive consumers to bootleggers, whose main selling point would be lower prices. So revenue and drug policy would suffer from too ambitious a tax plan.

“Over time, legal businesses’ pretax costs should drop, for two reasons. One is that the state prohibition premium, extra costs caused by illegality under the laws of Vermont, will disappear. Continuing federal illegality will impose some continuing premium. The other is that maturing businesses generally tend to see costs go down because of such factors as innovation, increased capacity, amortization of start-up costs, movement along the learning curve, economies of scale, and the need to meet competition.

“Lower costs are likely to result in lower pretax prices to the consumer. If so, unless taxes go up, after-tax prices will go down, encouraging use by youth and abusers.29 A tax burden that was just right at first could prove too low. If the state’s goal were steady after-tax prices, neither steady tax rates nor steady tax collections in dollar terms would achieve it.”